UPDATE 2-Fed’s Yellen says too soon to start reversing policy

* Economy not strong enough yet for policy shift – Yellen

* Dovish vice chair weighs into widening debate

* Exiting too slowly could push up inflation expectations
(Adds additional comments)

By Ros Krasny

NEW HAVEN, Conn., April 9 (Reuters) – The U.S. economy is
still not strong enough for the Federal Reserve to start
reversing its extremely accommodative monetary policy, a top
Fed official said on Saturday.

“Economic conditions do not yet call for the Fed to exit
from its unconventional policies,” Janet Yellen, Fed Vice
Chair, said during a panel discussion at Yale University in New
Haven, Connecticut.

Yellen’s comments focused on how the Fed handled the
challenge of boosting economic growth once it reached the “zero
bound” on interest rates in December 2008.

Her caution on reversing policy too soon were at odds with
some of the Fed’s hawks, who have been urging a quick reversal
to get ahead of rising inflation.

On Friday, Dallas Fed President Richard Fisher called on
the Fed to stop “spiking the punch bowl” with accommodative
policy. The Fed may need to end its $600 billion bond-buying
program earlier than its expected end in June, Fisher said.

Fed officials are aware of the need to ease up on the
policy gas pedal at the appropriate time, and has a “suite of
tools” to help, Yellen said.

In particular, purchases of securities beyond the level the
Fed has committed to could raise doubts about the Fed’s ability
to exit gracefully.

“That could lead to an undesired rise in inflation
expectations,” she said. A precise communications strategy will
be key to guiding market expectations, Yellen noted.

Yellen said the Fed’s policies in the wake of the 2008
financial crisis — slashing interest rates to the bone, and
then committing to buy more than $2 trillion in government
bonds and mortgage debt — had been on point, especially in
heading off a potential deflationary spiral.

Studies suggest the underlying U.S. inflation rate is now a
percentage point higher than it would have been if the FOMC had
not gone ahead with quantitative easing.

The latest reading on the Fed’s preferred inflation gauge
showed it was up 1.6 percent year on year, still below the 2
percent comfort zone held by many Fed officials.

Still, many Fed officials now fear inflation could start to
accelerate as rising commodity prices flow into the U.S.
economy through higher food and energy costs.
(Reporting by Ros Krasny; Editing by Todd Eastham)
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UPDATE 2-Fed’s Yellen says too soon to start reversing policy